How German-based SAP is creating a startup ecosystem from Silicon Valley

How German-based SAP is creating a startup ecosystem from Silicon Valley

ON JULY 19, 2013

The story of nearly every traditional (read: stodgy) enterprise technology provider — IBM, Microsoft, Dell, HP, Oracle, SAP, Cisco — goes something like this: Create a cash cow (maybe two), watch the business get disrupted by new ideas and more nimble upstarts, use size to squash those ideas or, eventually, embrace them or buy the companies behind them, and attempt to re-invent the business before the cash cow bleeds out.

So try this iteration on for irony: 40-year-old SAP has built an impressive ecosystem around HANA, a fledgling technology with its heart in the company’s Waldorf, Germany headquarters and its head in Silicon Valley, home to SAP Startup Focus.HANA is a platform for deploying analytic and transaction-based applications completely in main memory (IBM has a 100 terabyte HANA configuration, for instance). It includes the HANA database, a columnar store database management system that promises to deliver real time, or near real time results on the most sophisticated applications and complex data sets. The idea here isn’t just to speed up database queries — although it does that, too — but to fundamentally change business processes. SAP has started to ship some of its own enterprise software on HANA.

HANA is on a run rate to achieve $1 billion in revenue according to Bill McDermott, SAP’s co-CEO. That run rate isn’t just for giggles. SAP’s 2013 full-year guidance for HANA is between $850 to $980 million. The technology provided only $133 million in Q2, but McDermott said the pipeline is full and the outlook is back-end loaded.

McDermott spoke with me about SAP’s growth initiatives after the company’s earnings announcement yesterday, when he, and his fellow executives reported fairly disappointing misses, including on its core software licensing business, which saw a  downturn because of economic conditions in key Asian regions.

McDermott says that if HANA hits its growth target, it will be “the fastest growing software product in history.” And since SAP executives say the company’s challenges in Asia will continue, the overall business is going to need that boost.

The SAP Startup Focus Program, headed by VP Kaustav Mitra, is part of SAP’s plan to build an ecosystem around its new platform, and obviously to continue to build that sales pipeline. The program began over a year ago with about 10 startups, and now includes more than 500. Being part of the program gives entrepreneurs access to the HANA platform, training and support in porting applications to the new architecture, and then, eventually, access to the SAP customer base.

Mitra says that the classic application for HANA isn’t just one that needs a performance boost, although that’s certainly a big HANA selling point. He says that some HANA customers are seeing anywhere from 300- to 3,000-times improvements in performance (SAP CTO Vishal Sikka talks about 10,000x performance in a blog on SAP’s site).

“Performance is nice,” Mitra says, “but it’s hard to justify deep, meaningful value to say a report runs faster.” The key is gaining enough of a quantitative jump that the application and the outcome are qualitatively different, and open up new possibilities, he adds.

Warwick Analytics, for instance, had an off-line batch process that took 36 hours, and now takes 35 seconds on HANA, according to the company’s CEO, Dan Somers. Warwick Analytics makes technology that helps manufacturers find, fix and prevent quality problems, which is one of the biggest costs that sector faces. Its customers include Motorola, and some well-known automotive and electronics companies.

The accelerated batch process may sound like a simple performance boost, but it is a game-changer for Somers, who has been working with SAP through the startup program for almost a year, primarily because of the software company’s pedigree in manufacturing. “We’re handling lots of parameters,” Somers says. “[HANA] transformed our business, because if you have a problem in your factory and we solve it in the next day, you’re happy; but if you can solve it yourself, automatically, in real time, on the spot” it creates new possibilities.

That very notion led Warwick Analytics to create an entirely new business model, called “early warning and prevention system,” and a product called Sigma Guardian. Somers says this happened precisely because of what HANA provides. “We have a chance to move to zero-defect manufacturing. We call it Manufacturing 3.0,” he says. The company “pressed pause” on pretty much everything for the 2-1/2 months it took to bring its technology onto HANA.

Another example: FeedZai’s real-time credit card fraud analytics examines historical, stored data, and real-time, transactional data — say when a merchant needs to determine fraud risk at the point of sale. The complex algorithms required to provide that information could take advantage of HANA’s architecture, Mitra says. FeedZai also happened to get funding in January from SAP’s HANA Real Time Fund, which is flush with about $405 million. Some of that is set aside for other investing in the analytics arena, Mitra says, but it also makes Series A or seed stage investments.

Based in Redwood City (near SAP rival Oracle), Feedzai is further proof that SAP is capable of tapping into the vibrant Silicon Valley entrepreneurial bloodline, and even fostering it through its Startup Focus program.

Kaustav’s team also occasionally recommends companies to SAP Ventures, an independent sister company, but those companies must still meet SAP Ventures criteria. Just for Kaustav to recommend a company it must have a solid management team and customer traction.

The amount of time a startup takes to get an application working on HANA varies, Mitra says, but on average it’s six to nine months. Because HANA is SQL compliant, the simplest application porting can mean swapping out the database and making JDBC calls to HANA, Mitra says, and that can be done in less than a week. But taking full advantage of the in-memory capabilities of HANA requires a much deeper level of integration.

NexVisionIX, a decision platform for retailing environments, which counts Crate & Barrel, Papyrus and Charlotte Russe as customers, took more than three months to port its application to HANA. Rick Dutta, NexVisionIX’s CEO says the company wanted to take advantage of every layer of the architecture.

The NexVisionIX application is a complex retail data model that involves merchandizing, e-commerce and CRM, and it uses HANA’s power to provide what-if planning and on-the-fly predictive analytics around average market basket size, down to the customer segment.

Further, as the retail segment continues to embrace personalized customer experiences, real-time analytics becomes a necessity. And as physical retail environments add more video to help prevent theft, analytic engines like HANA will help turn that into a real-time video analytic opportunity: stores could understand customer service needs, or why customers are flocking to an aisle but not making a purchase, and apply even more personalization through facial recognition.

For SAP, these startups create a new channel for sales. The startups get to ride on SAP’s giant coattails. “We really want to be a platform company,” McDermott says. That means “attracting VCs, entrepreneurs, and business people building new applications, but also new business models.”

Mitra says SAP has about 30 startups ready to start selling products; about five are already selling solutions.

SAP also provides HANA in the cloud. HANA Enterprise Cloud runs in SAP’s data center, while HANA One runs on Amazon Web Services. NexVisionIX’s Dutta thinks that many of his company’s retail customers will choose the cloud route. That wouldn’t surprise McDermott, who must have mentioned HANA Enterprise Cloud a dozen times during our conversation.

The “cloud” is another key initiative for SAP, and McDermott took pains to cast Oracle’s latest moves – partnering with and Microsoft – as his rival having “outsourced their cloud innovation,” introducing “more complexity” by “creating patchwork solutions.” This is, of course, the typical fun, competitive tomfoolery each side engages in.

McDermott argues that Oracle is “a very distracted company” because its hardware investments haven’t worked out and so it’s had to look at “mashups” that help them make money. Oracle, of course, has its own in-memory technology powering its Exalytics system. The two companies have gone toe-to-toe on in-memory, slinging extra helpings of hyperbole.

As for running Oracle technology on Microsoft’s Azure cloud, McDermott tells me he would “warmly welcome” the opportunity to have HANA certified on Azure as well.

Many of SAP’s recent moves, McDermott says, are based on a renewed level of “design thinking and innovation.” He points to the Hasso Platner Institute in Germany, and its work with Stanford University, as well as the company’s highly regarded CTO Vishal Sikka, who is based in Palo Alto.

When asked if Sikka and the Startup Focus program is a shift the company is making to become more Silicon Valley centric, McDermott says:

One thing all companies have in common is that there’s a scarcity of geniuses. We want to let them innovate and change the world. Vishal brings an immense level of thoughtfulness, trust, insight and vision to the technology world regardless of where he is… It’s a global software company and Germany remains important. It’s our heritage.

He adds: “SAP can be a growth company that can serve generations.”

We’ll soon see if SAP can deliver, from Germany, Silicon Valley, or just simply globally.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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